The Wisdom of Crowds

Chapter eleven of Wisdom of crowds focused on markets. Most of the time markets do there job very well. A market’s job is to assign correct values to stocks and commodities. Markets function well at determining value because there are a lot of educated people whose job is to buy stocks when they are undervalued, making the stock go up, and sell stocks when they are overvalued, making the stock price go down.

Just like any wise group a market needs have a group of decentralized, diverse, independent people, who cooperate. When a market stops being diverse and independent a bubble occurs. A bubble is when a stock or group of stocks becomes highly overvalued.

Bubbles occur when people stop thinking about what the value of a given stock is and what they think other people think the value is. After all if you can predict that everyone will overvalue a stock you should buy it and sell it before people come to their senses.

I demonstrated the difference between thinking for yourself and bubble thinking by asking everyone to pick their favorite artist out of a group of six artist or bands and then try to pick the artist or band that most people would pick. With just one acception everyone picked either Kanye West or Taylor Swift. Taylor Swift and Kanye shared the favorite vote. Taylor Swift won the popular vote by one vote. Only six people didn’t change their answer from the first to the second vote. That means eight people thought their favorite was not the most popular artist.

One of the key lessons of the Wisdom of Crowds is that we don’t always know where good information is. That’s why, in general, it’s smarter to cast as wide a net as possible, rather than wasting time figuring out who should be in the group and who should not. This idea is well suited to the internet. The more information a group has, the better its collective judgement will be, so you want as many people with good information in a group as possible. The Wisdom of Crowds is not an argument against experts, but against our excessive faith in the single individual decision maker. If a group is smart enough to know whether an individual is a genuine decision-making prodigy, then the group is smart enough to not need that individual. Even brilliant experts have biases and blind spots, so they can make mistakes. What’s troubling is that, in general, they don’t know when they’re making those mistakes. Experts don’t know when they don’t know something. That’s why it’s worthwhile to cast a wider net and why relying on a crowd of decision makers improves (though doesn’t guarantee) your chances of reaching a good decision. Be careful to keep the group diverse, and careful to prevent people from influencing one another too much. The crowd’s judgement is going to give us the best chance of making the right decision, and in the face of that knowledge, traditional notions of power and leadership should begin to pale. I am cautiously hopeful that they will, allowing us to begin to trust individual leaders less and ourselves more. Wisdom of crowds works on problems where there’s a true answer, or when some choices are better than others in some sense. The reason this works is that people are operating on private info, which may be bad or fragmented.

Deliberative democracy is a form of democracy in which deliberation is central to decision making. Deliberations are made among large groups and small groups and are an effective way to reengage people with civic life, give them a chance to voice their opinions in a meaningful forum, and learn about issues (Surowiecki 261). Deliberative democracy works through deliberative polling in which voters deliberate over issues the nation is facing and essentially govern themselves. Fishkin believes deliberative polling is a better reflection of what voters really think about national and state concerns and the lawmaking process.

Judge Richard Posner disagrees with Fishkin and deliberative polling. He believes that Americans are indifferent to cultural values, intellectual pursuits, and government matters. In his book he writes, “The United States is a tenaciously philistine society. Its citizens have little appetite for abstractions and little time and less inclination to devote substantial time to training themselves and less inclination to devote substantial time to training themselves to become informed and public-spirited voters.”

Is deliberative polling is beneficial and should it become common place in our society? I’m very gray on the matter. On one hand I believe that Americans are passionate about addressing the issues that they’re facing as citizens of the US, on the other hand I also believe that there are voters who are apathetic to the issues and would rather let an elected representative call the shots on the matters without taking their opinions into consideration.

Another form of democracy is representative democracy, in which people vote on a candidate and that elected politician represents the people and addresses the issues that they and the nation are facing. The Wisdom of Crowds was written when Secretary of Defense, Donald Rumsfeld and Secretary of State, Colin Powell were still in office and Surowiecki argues that political elites such as them cannot see past their own ideology on state matters and will not take public interest into account.

In a representative democracy the elected officials are considered experts who will make informed decisions. The group of “experts” making these decisions is very small compared to the deliberation of the voters. Surowiecki believes that when you shrink the size of a decision-making body, you also shrink the likelihood that the final answer is right. Pg. 267 I agree with Surowiecki and believe that the majority rule of voters should decide lawmaking practices.

Surowiecki ends the chapter, saying that, “The decisions that democracies make may not demonstrate the wisdom of the crowd. The decision to make them democratically does” (Surowiecki 271). In my opinion this statement leads me to believe that Surowiecki is a proponent of deliberative democracy even though he feels it is unachievable because he thinks voters are not willing to devote their time and energy to deliberation.

These are the two articles i will be discusing for today’s class: they are from the New Yorker, by James Surowiecki. The first article explains how Steve Jobs influenced apple from the software, hardware, apperance, technology, even the number of screws that go into a laptop. The colors used in the advertising show that Steve Jobs used marketing techniques that werent always cost efficant but uphold the mission of Apple and represent the brand. Steve Jobs wanted Apple to “Own and control the primary technology in everything we do”. Although he wanted everything to be formatted specifically to Mac computers, by allowing songs to be in MP3 format he opened the market and was able to get many other customers instead of only apple users being able to use itunes. Something Jobs always said was “saying no to ideas was as important as saying yes”. in giving up a little control, Jobs found alot more power…

in the second article, ‘The More the Merrier’, Surowiecki describes how companies that cut payroll costs and fire alot of employees might see the short term aspect of cutting costs, but suffer greatly in the long term. he feels that cutting costs have gone too far and that the customers are the ones paying- because theyre being forced to do more work. “But you can only outsource so much work before alienating your customers.”

These articles relate to the book, Wisdom of Crowds, because according to Surowiecki, “under the right circumstances, groups are remarkably intelligent, and are often smarter than the smartest people in them. Groups do not need to be dominated by exceptionally intelligent people in order to be smart.”

i feel that in the more the merrier it explains that it is better to have more people that are not necicarily the ‘experts’ to help customers than it is to have too few employees who are experts. also Steve jobs may have been one expert but he worked with groups to hear feedback , get ideas, and produce the products. although he may be the face of apple there is clearly a team behind him. The main thing to keep in mind is that there needs to be diversity in a group in order for it to be successful. If Steve Jobs didnt have a diverse group many of the same thinkers would chose certain things that would limit their popularity and ulitmately market share.

Here is what my presentation was going to say; the points I touched upon and didn’t.

Chapter 10 is basically discussing what works and what doesn’t work within the constraints of companies and corporations. Referring to “the crowd” in this chapter, would, I believe, be referring to employees. I found two main parts to this chapter interesting and the one other section also caught my attention.

Part 1:(page 194-195):

Zara does two things very well

First employees anticipate and adjust to its customers’ ever changing demands, trying to coordinate its behavior to match that of customers

Second coordinating actions and decisions of tens of thousands of its employees getting them to direct their energies and their attention toward the same goal: making and selling clothes that people want to buy

I found this whole concept interesting. I first found it interesting because I feel like this is something every company or corporation should try to achieve. The fact that Zara coordinates itself for customer behavior and attempts or tries to get all employees to reach the same goal. Of all companies the author choice this one to discuss.

As Surowiecki says; “The fundamental paradox of any corporation is that even though it competes in the marketplace, it uses instruments-plans, commands,controls-to accomplish its goals”

The questions I raised were;

Why do you think the author choice this company? What could they be doing differently compared to other companies and corporations (not in the fashion industry)?How do you think this transpires within the fashion industry?

Part 2: (pages 198-200)

Different ways of coordinating a business can be looked at as a reflection of gangster films in Hollywood.

-The first exemplified by The Godfather Part 2. business is run by a top down hierarchy like a traditional corporation.

-The second model of group organization can be seen in Michael Mann’s film Heat its

like a small business.

-The last model is in movies like Asphalt Jungle and Reservoir Dogs where individuals come together to pull off a single job and then disperses, very much the way an independent film gets made.

Which one does everyone think is the best and why? Each has its own pros and cons for the way a business should be run, and I think it mainly depends on the products being sold or manufactured.

Part 5:

(Page 212)

Lastly I thought Surowiecki’s description of the virtues of decentralization was very interesting. He explains it as two-fold.

First the more responsibility people have for their own environments the more engaged they will be, and second decentralization makes coordination easier.

The critique people have is that even if power is given within the company, it will still mainly land in the hands of the management. However, top down power is built into the DNA of the corporation so theres no point in trying to eliminate it.

Finally, no decision making system is going to guarantee corporate success. Its always a hard decision for corporations to decide whether it will work better with one man in power, having several men in levels of power, or if the power is spread evenly throughout the employees.

If you were to run a corporation which method do you think you would choose?

The SARS case helped the world realize how important collaboration is for scientists. The SARS case involved the top scientists from top countries in the world all working together within their collective groups but also collaborating across the world to their fellow scientists.

Quotes on page 162:

Collaboration guarantees a diversity of perspective. There are two quotes that signify the imporance of collaboration in this section.

“Scientists who collaborate with each other are more productive often times producing better science, then are individual investigators.” (When working together you will have better results because you are getting all different sides of an argument.)

“The most prolific man is also by far the most collaborating.” When seeing different points of view you will almost become smarter, you are opening yourself to seeing things in different ways.

“Scientific knowledge is somewhat cumulative.” every scientist takes the work of one and builds upon it. So even when a scientist is doing work alone, he is still in fact remaining within the basis of the Wisdom of Crowds because he is still using another’s information.

The book points out that the world of scientists is fascinating because no one is in charge (pg. 165) “we trust that allowing individuals to pursue their own self-interest will produce collectively better results than dictating orders.”

An issue within the world of scientists is that they are constantly fighting for recognition and attention within their field.

“Scientists are fundamentally competing for recognition and attention, that recognition and attention can only be afforded them by the very people they’re competing against (pg. 166).

This helps to increase originality amongst them because they all want recognition for the next best thing so they are constantly searching for it, which in turn actually betters our world because new things are being discovered every day.

– “You can’t listen and read everyone, so you only listen to the best,” however as stated earlier in this chapter scientific work is never done alone its always done with the wisdom of others so this could be why recognition is so fought for in this field, because it is extremely hard to come by.

pg. 167 The conflict between business and science is a challenge that many corporations have put on scientists. “The fact that public funding is still instrumental to science, and particularly to basic research, insulates scientists to some extent from commercial pressures.” Scientists need funding to continue on with their work but this also leads to pressures from these commercial entities onto the scientists.

The “Spectacle of companies funding studies and then demanding that they be suppressed when the results do not come back to their satisfaction,” created the conflict between science and business (pg. 168).

Coordination Problems-problems that don’t have a “correct” answer, but instead are the idea of coordinating your actions with the rest of the group’s actions.

Examples:

Driving on the highway-You coordinate your speed and actions around the other drivers. You drive at a certain time of day to avoid traffic.

What time do I leave for work?

Where do we want to eat tonight?

How do we allocate seats on the subway?

Fundamental questions the economic system has to answer like: how much should my factory produce?

How can we make sure the people get the goods and services they want?

Page 86 ” In order to solve a coordination problem, a person has to think not only about what he believes the right answer is but also about what other people think the right answer is. That’s because what each person does affects and depends on what everyone else will do, and vice versa.”

Bar example:

If the bar is too crowded, then no one has a good time. If the bar is too crowded, no one wants to go. If everyone thinks the bar will be crowded, then few people will go and therefore it will be empty and anyone who goes will have a good time. How can there always be the perfect amount of people at a bar? SOLUTION: an all-powerful central planner, an uber-doorman who tells people when they can go to the bar. Even if this WAS possible, it interferes too much with the freedom of choice.

There is no guarantee that groups will come up with smart solutions. What’s striking though is just how often they do.

SCHELLING POINTS (be aware if your first instincts or thoughts while I explain this experiment)

From page 90/91: Schelling asked his students to imagine a scenario: 1. You have to meet someone in NYC. You don’t know where you’re supposed to meet and there’s no way to talk to the other person ahead of time. Where would you go? Majority of the students said the info booth at Grand Central Station. When will you show up at the information booth? Just about all of the students said noon. In other words, if you dropped two law students at either end of the biggest city in the world and told them to find each other, there was a very good chance that they’d end up having lunch together.

Experiments where an individual’s success depends on how well you coordinate your response with others:

If 60% of the answers are similar, it’s a Schelling point. People can typically reach beneficial results not only without centralized direction, but also without even talking to each other. Schelling points are beneficial because a lot of times large groups of people are unable to converse. Howard Rheingold argues that with new technologies, large collections of people can easily communicate.

Smartphone app examples: Yelp, Foursquare, Waze(GPS where strangers help each other on the road by telling the app where on your route there is a police officer, an accident, a traffic jam or any other type of driving obstruction).

A good solution to cooperation requires people to take into account what everyone is collectively doing & you must in turn create a broader definition of self-interest

Perspective: class discussions: if we don’t collectively cooperate with each other during class discussions, one of two things usually happen.

Everyone is talking at once and you get nothing from the conversation because you can’t hear what’s being said

Everyone is talking at once, you get nothing from the conversation because you’ve zoned out, and are resistant

If the mechanism of cooperation is right, coordination problems can be solved by the crowd even is each individual of that crowd is pursuing his or her own self-interest.

Example: Soccer: Italy v. South Korea (World Cup)

Italian fans did not blame the referee Byron Moreno for his incompetency (which they should have considering he made multiple poor decisions that in turn would have must likely given Italy the win) but instead Italian fans blamed Moreno for being criminal.

In Italy, defeat is never the outcome of a fair contest and in this country during soccer season, corruption is regularly assumed by the natural state of affairs.

SO, HOW does this relate to cooperation? “Making sure that games are both entertaining and compelling for the fans. The MORE interesting the game, the more likely it is people will come, the greater ticket sales are, and TV ratings will be…” (110)

In theory, the competing teams and referees are working together to produce entertainment.

Cooperation & Reward

Put simply, people want there to be a relationship between accomplishment and reward. They want the result to be FAIR!

Example: in American society, we are more likely to believe that walth is the result of initiative and skill, while Europeans are far more likely to attribute it to luck. (115). WHY IS THAT? (Ask Class)

America- country of immigrant whose mentality was you have to work for what you have. Americans believe you can work your butt off and achieve such riches. Europe was already in a wealthy state and mentality is out of the culture of wealth: either you have it or you don’t, and if you “good for you.”

Story in book: Richard Grasso, was first CEO in American history to get fired for making too much money.

Cooperation is the result of repeated interactions with the same people. “The foundation of cooperation is not really trust, but the durability of a relationship”.

stability in place to work from, confidence in commitment, and knowledge in how to produce (120)

Societies and organizations only can work if people cooperate.

What is most interesting is that we don’t regularly cooperate with those we know, instead we cooperate with strangers.

Cooperation is a game of trust- while all we can really trust is that the other person will recognize his or her self-intrest, over time, that reliance on his or her own attention to their self-interest becomes something more. It becomes a state of reliability and a willingness to cooperate

(153) Coordination on the highway is difficult because of the diversity of drivers

In a perfect world, everyone would drive at the same speed needed to keep a smooth traffic flow

(147) It’s odd that we have adjusted to congestion pricing in other parts of life (long distance phone calls cost more money during the day, drinks are cheaper during happy hour, costs more to go to Las Vegas on the weekend than during the week)

(149) “The point of congestion pricing is to get people to coordinate their activities better by balancing the benefits they get from driving against the costs they inflict on everyone else.”

(155) If drivers are the problem then take the steering wheel out of their hands. This is easier said than done; people don’t like giving up control or handing their lives over to a computer

(156) Achieve coherent flow: need a way to keep drivers from constantly slowing down and speeding up, and a way to smooth out the flow of cars entering the highway

(156) Goal to solving traffic problem: “ensure that the cars get on the highway when there’s room for them and when their presence fill a gap, thereby encouraging the traffic to fall into a coherent flow.”

Traffic coordination relates to the wisdom of crowds because:

want the crowd diverse enough to give diverse information that other people have not heard before

if the traffic crowd is too diverse, people will overreact on the road (braking, switching lanes)

if the group is too diverse, it makes it easier for people to make decisions based on facts

have to coordinate the flow of ideas in a crowd so that they will be helpful or “fill a gap”

This Monday I presented Chapter 2 of the book Wisdom of the Crowds, named “The Difference Difference Makes: Waggle Dances, The Bay of Pigs, and the Value of Diversity”. I know my presentation wasn’t anything like our dear Paul’s, but I hope you all learned a little bit!!!

Here is a summary about what the chapter entails:

The importance of diversity here is not in a sociological sense (defining, for example, race, ethnicities or cultures- although they can be a part of it) but in a conceptual and cognitive sense (of ideas, opinions, perspectives).

The more similar a group is, the more similar the ideas they appreciate will be. On the other hand, if the group is diverse, the chances of someone gambling, taking a chance, bringing in a different perspective increases.

Intelligence is important, but alone is not enough. Intelligence does not guarantee different perspectives on a problem.

Diversity is even more important on small groups. In large groups, diversity is almost guaranteed and in small groups it’s easy for a few based individuals to exert undue influence and skew the group’s collective decision.

Groups too much alike= too much time exploiting and not enough time exploring.

Value of expertise is overrated, since they provide a narrow view. Experts usually overconfident.

Why do we cling to the idea of experts? We assume averaging means dumbing down or compromising!

“The crowd is blind to its own wisdom.”

When decision makers are so much alike, they easily fall prey to Groupthink, like in the Bay of Pigs or the failure to anticipate Pearl Harbor.

Groupthink is when a cohesive group becomes dependent and more convinced that the group’s judgment on important issues must be right. An illusion of invulnerability. Convinced they’re right, there is no one to challenge conventional wisdom.

That’s more or less the core of the chapter! Hope you all understand.

Oh, and click here for my semester projectblog, I have updated it!!!! Please check it out, I swear it won’t take too long! 🙂